STOCKS SURGE AFTER CONGRESS PASSES BILL -- SMALL-CAPS AND MID-CAPS LEAD AS IWM AND MDY FORGE 52-WEEK HIGHS -- TREASURIES PLUNGE AS MONEY MOVES OUT OF SAFE-HAVEN ASSETS -- SEMICONDUCTOR AND NETWORKING STOCKS LEAD TECHNOLOGY SECTOR
STOCKS SURGE AFTER CONGRESS PASSES TAX DEAL... Link for todays video. Stocks surged on the heels of a new year and a new tax deal. Stocks ended the year strong as several major index ETFs formed bullish engulfing patterns on Monday, December 31st. These patterns reflected optimism that Washington would indeed pass a tax deal to soften the blow of the fiscal cliff (slope). The Senate passed its bill in the early hours of 2013, while the House passed the bill late last night. Chart 1 shows the S&P 500 ETF (SPY) forming a large bullish engulfing pattern and then surging above 145 early Wednesday. Notice that SPY reversed in the support zone that was put forth in the Market Message on December 26th. This late December low affirms key support in the 139-140 area. The two day gain erased the losses from December 19th to 28th and SPY is now challenging resistance from the September-October highs. The indicator window shows RSI bouncing off support in the 40-50 zone, which typically holds during an uptrend. Chart 2 shows the Nasdaq 100 ETF (QQQ) breaking the mid September trend line and exceeding its mid December high with a huge gap. This gap better hold.
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Chart 1
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Chart 2
SMALL-CAPS AND MID-CAPS LEAD AS IWM AND MDY FORGE 52-WEEK HIGHS... Small-caps and mid-caps started leading the market in mid November and continued their leadership role to start the year. Chart 3 shows the Russell 2000 ETF (IWM) finding support around 82 and surging above its mid September high. After forming a falling flag in late December, IWM broke flag resistance with a bullish engulfing on Monday. While todays gap and follow through are clearly bullish, IWM is already short-term overbought after a 5% advance the last two days. The indicator window shows the price relative breaking out in mid November and also breaking its mid September high. Chart 4 shows the S&P MidCap 400 SPDR (MDY) finding support at broken resistance (182) and surging to a new high today. Relative strength in small and mid-caps is a good sign for the domestic economy because these companies are less diversified and tend to focus on the US market.
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Chart 3
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Chart 4
TREASURIES PLUNGE AS MONEY MOVES OUT OF SAFE-HAVEN ASSETS... Judging from market reaction, the tax deal is a plus for the US economy and this sparked a sharp decline in US Treasury bonds. Treasury bonds are very sensitive to the economy. Treasuries rise and yields fall when the economic outlook is uncertain or negative. Conversely, Treasuries fall and yields rise when the economic outlook is positive or improves. Also note that stocks and Treasuries are inversely correlated, which means they move in opposite directions. Chart 5 shows the 20+ Year T-Bond ETF (TLT) breaking down in mid December, bounding to broken support at the end of December and turning sharply lower the last two days. This sharp decline signals a continuation of the August-September decline and targets a move below the September low. Further weakness in Treasuries would be positive for stocks. Dont forget that we have the employment report on Friday and the Fed recently tied interest rate policy to the unemployment rate. Chart 6 shows the 10-year Treasury Yield ($TNX) challenging resistance from the August-December highs.
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Chart 5
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Chart 6
SEMICONDUCTOR AND NETWORKING STOCKS LEAD TECH SECTOR... The Technology SPDR (XLK) remains one of the weaker sectors overall because the ETF is still well below its September high. In contrast, the Finance SPDR (XLF), Industrials SPDR (XLI) and Consumer Discretionary SPDR (XLY) hit fresh 52-week highs today. Nevertheless, there some pockets of strength within the technology sector and Apple (AAPL) continues to hold support around 500. Chart 7 shows the Networking iShares (IGN) forming a higher low in October and breaking above its September high in December. The ETF pulled back at the end of December, but managed to exceed its December high with a surge above 29 today. This move reinforces support at 27.50. The indicator window shows the price relative hitting a multi-month high as IGN continues to outperform SPY. Chart 8 shows the Semiconductor SPDR (XSD) breaking out in late November and holding above the breakout in late December. The two day surge reinforces support in the 43.5-44 area. Chart 9 shows Apple surging to resistance from the October trend line and mid December bounce. There is a lot of support in the 500-510 area.
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Chart 7
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Chart 8
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Chart 9
RETAIL SPDR FALLS AFTER SHARPLY HIGHER OPEN... I focused on the Retail SPDR (XRT) in late December because of resistance and relative weakness. Stocks are surging and holding their gains today, but XRT is lagging again. Relative weakness in retail could come back to haunt the market. Chart 10 shows the ETF surging above resistance on the open, but moving back below the breakout during the day. Resistance in the 63.5 area stems from the highs extending back to early October. Overall, it is possible that a large triangle is taking shape and the ETF broke the upper trend line with todays gap. This gap, however, better hold to keep the breakout alive. A move back below 62 would be quite negative for this key industry group ETF. The 200-day moving average and late December low mark a major support level at 60. A break below this level would be long-term bearish. The indicator window shows the XRT:SPY ratio breaking the August trend line and trending lower the last five weeks. Chart 11 shows the Market Vectors Retail ETF (RTH) hitting resistance from the October-December highs. RTH also formed a black (filled) candlestick as prices declined after a strong open.
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Chart 10
